executive MBA subject 06

Financial Management

Year 1, term B. 5.0 ECTS, about 125 hours, 6 parts. Part 1 is free.

task, condition, standard

What you will be able to do

Task, condition and standard

Task

Evaluate an investment project and recommend whether to go ahead.

Condition

Given five years of forecast cash flows, a cost of capital and the firm's funding options.

Standard

Present value, payback and risk are correct, and the recommendation states what would change it.

Who it is for: Managers who must judge investments, budgets and funding.

how this subject works

Free entry, voice and your learning style

Part 1 is free to try. Read it, listen to it and answer it before you decide. Join the programme, or this subject on its own, to open the other parts.

Listen. Every part has a Listen button that reads it aloud.
Speak or type. Answer each part by talking (press Speak) or by typing. Your answers stay on this device only.
Learn your way. Every part has a See, Hear, Do and Read-and-write route. Not sure which suits you? Take the eight-question learning-style check.

6 parts

The parts, with worked examples

Part 1 Time value of money 21 hApply: calculate

Money today is worth more than the same money later, because it can earn a return. Discounting brings future cash back to today.

Future value = present value x (1 + r) to the power n
Present value = future value / (1 + r) to the power n
Higher rate or longer wait means lower present value

Worked example: Worked-example figures, in your currency. 1,000 received in 2 years at 10%: present value = 1,000 / 1.21 = 826.

Activity: Find the present value of three future amounts at 8%.

Standard: All three values correct to the nearest whole number.

Learn your way

See. Sketch "time value of money" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Find the present value of three future amounts at 8%.

Part 2 Bond and equity valuation 21 hApply: value

A bond is worth the present value of its interest and repayment. A share is worth the present value of the dividends it is expected to pay.

Bond prices fall when market rates rise
Growing dividend value = next dividend / (required return - growth)
Small changes in growth make big changes in value

Worked example: Worked-example figures, in your currency. Next dividend 2.00, required return 10%, growth 4%. Value = 2.00 / (0.10 - 0.04) = 33.33.

Activity: Value a share with two different growth rates and explain the gap.

Standard: Both values correct and the sensitivity explained.

Learn your way

See. Sketch "bond and equity valuation" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Value a share with two different growth rates and explain the gap.

Part 3 Risk and return 21 hUnderstand: explain

Investors want more return for more risk. Spreading money across many investments removes some risk for free.

Expected return = sum of chance x return
Diversification reduces risk that is specific to one firm
Market-wide risk cannot be diversified away

Worked example: Worked-example figures, in your currency. An investment returns 20% with 50% chance and 0% with 50% chance: expected return = 10%.

Activity: Calculate the expected return of two investments with three outcomes each.

Standard: Both expected returns correct and the riskier one identified.

Learn your way

See. Sketch "risk and return" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Calculate the expected return of two investments with three outcomes each.

Part 4 Cost of capital 21 hApply: calculate

The cost of capital is the return investors require. It is the minimum a project must earn.

Weighted average of the cost of debt and equity
Debt is cheaper after tax because interest reduces tax
Use market values for the weights

Worked example: Worked-example figures, in your currency. Equity 60% at 12%, debt 40% at 6% before tax, tax rate 25%. After-tax debt = 4.5%. Weighted cost = 0.6 x 12 + 0.4 x 4.5 = 7.2 + 1.8 = 9.0%.

Activity: Calculate the weighted cost of capital for a firm with three funding sources.

Standard: Weights add to 100% and the result is correct.

Learn your way

See. Sketch "cost of capital" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Calculate the weighted cost of capital for a firm with three funding sources.

Part 5 Capital budgeting 21 hEvaluate: decide

Net present value adds up all discounted cash flows. If it is above zero, the project earns more than its cost of capital.

NPV = sum of discounted cash flows minus the investment
Payback shows how fast cash comes back
Use NPV to decide; use payback as a risk check

Worked example: Worked-example figures, in your currency. Invest 1,000; receive 500 a year for 3 years at 10%. Present values: 455 + 413 + 376 = 1,244. NPV = 244, so go ahead. Payback is 2 years.

Activity: Calculate NPV and payback for two projects and choose one.

Standard: Both NPVs correct and the choice follows the NPV rule.

Learn your way

See. Sketch "capital budgeting" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Calculate NPV and payback for two projects and choose one.

Part 6 Financial planning and forecasting 21 hCreate: forecast

A forecast links sales growth to the assets and funding the firm will need. It shows early when extra money must be raised.

Start from sales growth
Assets that grow with sales: stock, receivables
Funding gap = extra assets - retained profit

Worked example: Worked-example figures, in your currency. Sales grow from 1,000 to 1,200. Assets are 50% of sales, so they rise by 100. Retained profit is 40. Funding gap = 100 - 40 = 60.

Activity: Build a one-year forecast and find the funding gap.

Standard: The gap is calculated correctly and a funding choice is named.

Learn your way

See. Sketch "financial planning and forecasting" as a picture: boxes, arrows and the key number.
Hear. Press Listen, or explain the worked example aloud to someone.
Do. Do the activity with your own work or a practice case.
Read and write. Write the idea in three lines in your own words below.

Your answer. Build a one-year forecast and find the funding gap.

ten checks

Check yourself

Say or write your answer first, then read the model answer.

Q1. Present value of 1,000 in 2 years at 10%?
Model answer: About 826. (Covered in part 1: Time value of money.)
Q2. Why is money today worth more than later?
Model answer: It can be invested to earn a return. (Covered in part 1: Time value of money.)
Q3. Dividend 2.00, return 10%, growth 4%. Share value?
Model answer: 33.33. (Covered in part 2: Bond and equity valuation.)
Q4. What happens to bond prices when rates rise?
Model answer: They fall. (Covered in part 2: Bond and equity valuation.)
Q5. 50% chance of 20%, 50% chance of 0%. Expected return?
Model answer: 10%. (Covered in part 3: Risk and return.)
Q6. Which risk cannot be diversified away?
Model answer: Market-wide risk. (Covered in part 3: Risk and return.)
Q7. Why is debt cheaper after tax?
Model answer: Interest reduces taxable profit. (Covered in part 4: Cost of capital.)
Q8. Equity 60% at 12%, debt 40% at 4.5% after tax. Weighted cost?
Model answer: 9.0%. (Covered in part 4: Cost of capital.)
Q9. A project has NPV of +244. Accept or reject?
Model answer: Accept. (Covered in part 5: Capital budgeting.)
Q10. Extra assets 100, retained profit 40. Funding gap?
Model answer: 60. (Covered in part 6: Financial planning and forecasting.)

slides L1 to L7

The seven-level ladder, slide by slide

Slide 1: L1 Money and time. Why timing matters. Speaker note: Say: put "money and time" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 2: L2 Discounting. Present and future values. Speaker note: Say: put "discounting" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 3: L3 Valuing securities. Bonds and shares. Speaker note: Say: put "valuing securities" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 4: L4 Risk and return. Expected return and diversification. Speaker note: Say: put "risk and return" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 5: L5 Cost of capital. The hurdle rate. Speaker note: Say: put "cost of capital" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 6: L6 Investment decisions. NPV and payback. Speaker note: Say: put "investment decisions" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.
Slide 7: L7 Planning funds. Forecasts and funding gaps for the board. Speaker note: Say: put "planning funds" in one sentence and give one example from work. Check: ask one learner to say it back in their own words. Mistake: moving on before the numbers are clear.

how it is judged

Marking rubric

Marking rubric (Not yet, Meets, Exceeds)
Criterion	Not yet	Meets	Exceeds
Accuracy	Several figures or facts are wrong.	Main figures are correct and the working is shown.	Figures are correct and checked a second way.
Use of financial management tools	Tools are named but not used.	The right tools are used for each step.	Tools are adapted to the case and their limits are stated.
Recommendation	No clear answer.	A clear answer backed by the analysis.	A clear answer that also says what would change it.
Communication	Hard to follow.	Answer first, clear and short.	Clear, short and persuasive under questions.

jobs this leads to

Where this takes you

Financial controller. Plans budgets and funding.
Investment analyst. Values projects and securities.
Treasury manager. Manages cash and borrowing.

language

Choose your language

This subject is in English first. Choose any language and the page is translated for you by machine, with the English kept as the official text.

Keep going

All subjects Previous: International Accounting Next: Quantitative Analysis

Draft for review. Not live. Credit values are aligned with the European credit system for orientation only and are not an accreditation.